Are the Bulls on Shaky Ground?
Last week, my esteemed colleague Tyler Laundon
asked the question, “Is a Correction
Coming?”
In his eloquently written article he briefly
pondered the question, “…will the big money sell in May?" Obviously, he
was alluding to the old Wall Street adage that always surfaces this time
of year, 'sell in May and go away', or what some on Wall Street call the
summer doldrums.
I have heard this phrase countless times over the
years so I decided to do a statistical test of sorts to see if the adage
was indeed valid. If the cliché held water than maybe selling in April
(before everybody else) is something to consider, particularly over the
intermediate-term.
I looked at the historical average return of the
S&P 500 on a monthly basis over the last 60 years.
Here is what I found:
As you can see the 'sell in May' theory has some
validity and should be taken into consideration. The above stats prove
that the summer doldrums are not just a figment of Wall Street’s
imagination. Stocks do indeed tend to provide lackluster returns over the
summer months.
The Stock Trader’s Almanac carries the study a bit
further. The seasonally-based publication states that a $10,000
investment in the S&P 500 compounded to $544,323 during the
November-April period over the last 56 years, compared to a meager $272
loss for the May-October period.
The Almanac calls trading this phenomenon “an
eye-popping strategy.” Indeed, it would have netted great returns in the
past 60 years. One reason the strategy would have been so successful is
because market crashes or corrections have tended to occur in September
or October, including in 1929, 1974, 1987, 2001, 2002 and
2008.
But there are some practical problems with selling
in May and going away. First, there is no guarantee that the trends of
the last 60 years will continue over the next 60. Second, 60 years is
just one sample period. It would be interesting to review returns over a
variety of time periods.Third, not all stocks are created equal. This
study is for the S&P 500, a broad measure of the stock market. We
could look at an alternative asset class, such as just small cap stocks.
It’s possible the stock market’s supposed seasonality is just us finding
patterns in random events.
Another problem with sell in May and go away: Go
where? If you move your holdings into cash, you'll miss out on any
May-through-October gains, which have occurred for 12 of the last 20
years. Add in tax on capital gains and transaction costs and your
capital's summer vacation starts to look much less
appealing.
Keep all of these factors in mind as we move into
the summer months. Corrections happen. Sideways action happens. The
market can’t continue to advance in this manner without corrections and
lengthy consolidation periods. This is the nature of the
market.
Consider learning alternative investment strategies as a way to diversify your current portfolio so that you are better equipped in any market environment, bullish, bearish or neutral. And remember that over the long term small cap stocks always outperform.
As Tyler states, “My job depends on making
subscribers money, not being a perma-bull who isn't aware of the bear
lurking in the shadows…. I see a lot of attractive investment
opportunities out there right now, but remain cautiously optimistic. Take
care of the downside, and the upside is far easier to
capture”.
There might be other good reasons to lighten up exposure to stocks right now, but I don’t think the calendar is one of them.
